The revenge of Jansen

Far in Saskatchewan’s southern plains, between immaculate century-old villages and snow-dusted grain fields, Australian mining giant BHP Billiton Ltd. is toiling hard to grow a Canada-based potash business from the underground up.

Its foundation, the planned Jansen project, is beginning to take shape near the rural municipality of LeRoy, 140 kilometres east of Saskatoon. Two shafts — one to hoist ore, the other men and equipment — are being prepped to sink a kilometre below the surface, where the province’s immense ore deposits lie.

A giant refrigeration plant, the site’s central facility, has started producing brine that is pumped below, freezing the ground so the shafts can be cemented and sealed through a big aquifer that stands in the way.

Coming up next is the carving of an underground city that will be teeming with workers in assembly and maintenance shops, lunchrooms and refuge stations, a maze of tunnels and production areas.

Pending final sign-off next year from the Melbourne-based company’s board of directors, production of the coveted fertilizer is slated to start in 2015, bound through a West Coast port to hungry populations around the world.

When Jansen reaches its full capacity, eight million tonnes a year, it will be the world’s largest potash operation.

It will also be the flagship of a potash rush in Saskatchewan involving dozens of billions of dollars in investment that promises to give Canada’s other resource hot spots, including Alberta’s oil sands, a run for their money — and their labour.

With a friendly multinational staff and modern new headquarters in Saskatoon’s core, it’s hard to believe this is the same multinational that only a year ago fought an acrimonious hostile battle to take over Potash Corp. of Saskatchewan, the provincial crown jewel, and lost after Ottawa blocked its $39-billion offer.

The then-Federal Industry Minister, Tony Clement, rejected the bid after Saskatchewan’s Premier, Brad Wall, complained it would not bring a “net benefit” to the country, while the company argued it was too low.

The popular premier was particularly concerned about the fiscal hit on the province’s royalty income. If BHP had taken over Potash, it would have been able to deduct the capital cost of its new mine against Potash’s existing profits. By building a new business, it will have to wait until profits are flowing before it can deduct capital costs, promising greater provincial revenue.

While Mr. Clement gave BHP 30 days to revise its offer, BHP decided to withdraw. But instead of packing up, as big corporations are known to do in response to hardball politics, the company decided to get down to work on its next best plan: building a potash business from scratch.

The Jansen project was already in advanced planning and previous acquisitions gave BHP a land exploration base of more than 14,500 square-kilometres.

“You can be stubborn and walk away from the table, or you can look at the facts and say: ‘That didn’t work, still a good place to be’,” said Tim Cutt, president of BHP Canada Billiton Canada Inc., a former senior executive at Exxon Mobil Corp. who moved to Saskatoon this summer to take charge of the massive build-up.

“Our company thinks in decades, not hours. If you think about what we have the opportunity to do here, it’s not a tough decision. We just decided this is where the best potash in the world is, we know how to operate in Canada, and we know we can operate successfully in potash.”

It helped that the community welcomed BHP with open arms immediately after the fight, enabling the company to shift gears quickly, he said.

The province’s reaction to the takeover battle was seen outside its borders as a throwback to its social-democratic heritage. The big worry was that it would damage Canada’s reputation as a place to invest.

Inside, it was seen as promoting competition and as a show of confidence in its immense resource base. It’s only recently that this humble, hard-working province stopped the outflow of its best and brightest, mostly to Alberta.

That confidence was reflected in the landslide re-election Monday of Mr. Wall and his Saskatchewan Party, the conservative party that nearly wiped out the once-dominant and business-hostile NDP.

“After years of losing our young people to other provinces, our population is now growing back, and we’re not going back,” Mr. Wall told constituents in Swift Current in his victory speech. “Today, after years of lagging behind the rest of the country, we are leading in so very many respects.”

Indeed, investment in Saskatchewan, in potash and in other resource sectors such as oil and uranium, didn’t miss a beat in the past year and the provincial economy is booming. As new headquarters move in, Saskatoon has grown into a business magnet.

“The message [to BHP] was not that we don’t want to do business with you, the message was that we really want to do business with you,” said Bryan McCrea, a young entrepreneur who builds work-site structures.

Like many in the province, Mr. McCrea believes Saskatchewan got the best of both worlds by keeping Potash and BHP apart because it now has two major players competing to expand, boosting demand for services, labour and equipment. If BHP’s takeover had been successful, it may not have ramped up its new projects as quickly.

Kent Campbell, Saskatchewan’s deputy energy minister, said foreign investors are looking past the failed deal as a one-off that didn’t work out, not as the beginning of an anti-investment climate.

In the past year, two top global mining multinationals, Brazil’s Vale Ltd. and British/Australian Rio Tinto Group, joined BHP in the province with plans to build potash businesses, while Germany’s K+S Group purchased Potash One and is working on its own mine.

Meanwhile, investments already under way have made Saskatchewan Canada’s hottest mining jurisdiction.

BHP’s Jansen mine is expected to cost $12-billion to $15-billion to build to its maximum capacity. BHP is looking at a further “conveyor belt” of mines to increase its production from Saskatchewan to 16 million tonnes of potash a year. It has spent $2-billion so far in its Canadian business.

K+S is expected to spend about $3-billion on a solution mine.

All of this is expected to increase the province’s potash production to 17.5 million tonnes this year, from 13 million tonnes when expansions began in 2006. Growth will be even more dramatic when expansions are completed and as new projects are built.

To be sure, Saskatchewan’s gamble could have backfired if it didn’t have so much of what the world wants now — it holds 46% of the world’s potash, a nutrient the colour of red clay used by farmers to boost crops like corn, soybeans, coffee and rice. The other major reserves are in Russia.

Saskatchewan’s deposits were formed hundreds of millions of years ago, when the province was covered in sea. They were accidentally discovered in the 1940s during the search for oil. Today, demand for potash is soaring as developing countries seek to feed growing populations.

In a conference call last month to discuss its third-quarter results, Potash Corp. CEO Bill Doyle said capacity is tight, supporting higher prices in the future, even in a slow global economy.

“Putting food on the table is always a priority in North America, but more significantly for people in developing countries,” he said. “This was highlighted through late 2008 and 2009, the most significant economic downturn in most of our lifetimes, when grain consumption still grew by more than 2% annually.”

Fending off BHP’s hostile advances paid off for Potash, whose New York Stock Exchange share price increased to more than US$180 — before a three-for-one split in February — well above the offer price of US$130.

Yet the former Crown corporation, until now the province’s big wheel, won’t be immune from increased competition from BHP, a global miner five times its size, as well as the new entrants. At the very least, it will face higher costs and more competition for labour.

Like BHP, Potash Corp. is expanding its Saskatoon staff, which sits at 250 after moving to the city members of its executive team that were previously based in Chicago, part of a commitment to the province following the takeover fight.

The company claims new projects are expensive at today’s prices for potash and may not materialize.

“We keep our attention focused on our own business,” said Potash spokesman Bill Johnson. “We got our $7.5-billion program under way, and we worry about what we can control. Our projects are under way, they are board-approved and they are bringing tonnes to the market just at a time when we think they will be needed at a much lower cost per tonne than any new greenfield project.”

BHP’s Mr. Cutt likes his lot, too, and expects the new business to be a big part of the company’s global assets within ten years.

“Our view of market demand is robust enough that there is room in the market for all of us,” he said. “We have a 70- to 100-year strategy here and we absolutely believe that we’ll be a very considerable player long-term in the province.”

The plan is to grow in steps. The Jansen project would be built in stages and take five to eight years to reach capacity. Meanwhile, planning of the Melville and Young mines will move forward in parallel.

While the company, with a market capitalization of US$200-billion, has plenty of financial capacity to back its plans, it acknowledges that one of its major challenges in Canada is labour. The Jansen project’s first phase will require 2,500 people to build, and another 1,000 people to operate at capacity. At its headquarters, its staff, 115 this week, is growing at a rate of one a day.

Among the areas it’s targeting for recruitment is Fort McMurray, Alberta’s oil-sands capital. The oil sands have a large concentration of people with the types of skills that are also in demand in the potash business, Mr. Cutt said.

But it believes working in potash in Saskatchewan has its advantages: it’s clean (there has been no environmental opposition to BHP’s Jansen project so far), it resonates with younger staff because it involves feeding the world, it’s long term, and it’s based in communities close to urban centres that welcome growth.

“The good news is that a lot of people left Saskatchewan over the last number of decades, and we are finding that a lot of people want to come home,” Mr. Cutt said.